Property prices up, acquisition activity down in Permian Basin

Paul WisemanMidland Reporter-Telegram

Published 7:00 am, Wednesday, February 16, 2011

While transaction values for Permian Basin producing properties are good, said Ken Olive, president of the Houston-based Oil & Gas Asset Clearinghouse, there have not been a lot of sales there in recent months. Olive speculated that, with oil prices high, current owners are holding onto their assets and producing them rather than selling them off.

The fact that oil prices are higher than natural gas prices is of particular benefit to the Basin, in Olive's view, because, "It's an oily basin, and anything that's productive of oil is certainly in favor right now."

In fact, in considering cash flow metrics, Olive said, "The Permian's metrics are always at the top or near the top" of all fields considered.

The Clearinghouse is one of the sponsors of this year's 17th annual Executive Oil Conference. The conference will be held March 28 and 29, with the sessions on March 29 at the Midland Center.

Olive noted a number of area producers that were primarily involved in gas have been switching to oil because of the price difference -- some are even changing their logos to reflect this shift in balance.

"With the resurgence of the Basin in terms of the Wolfberry and associated plays that are spinning off from that, there's a lot of interest there and a lot of repeatability," Olive said. He added that the Wolfberry, while not what would be termed a true resource play, is repeatable and relatively predictable, which are attributes that attract Wall Street investment.

Last year at this time activity was just beginning to recover from the precipitous price drop of late 2008 and early 2009. A year ago Olive predicted that the latter half of 2010 would be a very active time, as the oil patch began to trust that prices were going to remain high for at least awhile, and that turned out to be true.

Producers began announcing larger capital budgets in February of last year, which fueled the acquisition momentum that snowballed throughout the year. It was hoped that gas prices would stabilize at around $4 per mbtu and that oil would stay around $70-$80 per barrel, both of which did indeed occur.

Olive pointed out that the $4 gas price was not ideal but at least it was stable and somewhat predictable. "This business functions great if we have some stability - which is relatively rare," he said, wryly. "If we have predictability, in terms of pricing, and good data, then the people in our industry are ready and willing to make decisions and, as a result, bets on where and how to spend their money." Lack of either stability or good data causes producers to be more conservative.

Beyond the Permian Basin, especially in gas-intensive fields, transactions involving The Clearinghouse are on track to boom. They ended last year with a bang, closing a transaction for Exxon Mobil in the Gulf of Mexico that totaled $1.012 billion - a transaction that was being conducted during the Deepwater Horizon blowout last summer. Olive recalled that The Clearinghouse's staff members put in over 10,000 man hours in two and-a-half months doing the engineering, geological and geophysical work necessary to host the data rooms and complete the sale.

"We have a lot of things in the hopper that will be coming to market here shortly through all of our processes," including both negotiated transactions and auctions, Olive said.

As to the ratio of auctions to negotiated transactions, Olive does not see a trend one way or the other, each type of transaction is appropriate to certain deals and not to others.

Because the public companies are going after the unconventional plays this creates a major opportunity for private producers, in Olive's estimation. "This is a wonderful opportunity (for private independents) to acquire conventional plays. It's non-resource, non-repeatable, good old oil and gas exploration and production. Your public companies are not your competitors for once.

"If you're just an independent producer, you should be able to pick up properties that the publics are letting go of," he continued. Because the Basin is mostly conventional oil plays, that makes it a very attractive place for those non-public independents.